Does Production Labeling Stigmatize Conventional Milk?

Abstract

Production labeling is a common approach for differentiating otherwise similar products in the marketplace. While these labels may convey positive messages to consumers about the new product, they may simultaneously stigmatize the conventionally-produced product by highlighting perceived problems. The net economic result for producers can be negative since consumers may decrease their willingness to pay for the conventional product that dominates the market, while the new product has a relatively small market share. This research identifies this stigma effect in the case of milk, where the introduction of rBST-Free and organic milk reduces consumers’ willingness to purchase conventional milk. In this thesis, the question of whether production labeling is driving consumer’s bias against conventional milk is investigated in an experimental setting by eliciting the willingness to pay in a sample of Cornell University staff and graduate students for milk produced via different production methods and of varying fat contents. Through altering the order in which participants bid for the different types of milk and analyzing the resulting data using a two-limit random-effect Tobit model with instrumental variables, we find that consumers are indeed willing to pay a premium for rBST-Free and organic milk despite a lack of scientific evidence regarding harmful effects of rBST on human health. The results illustrate that, by varying the order in which experiment participants were allowed to taste and learn information about milk produced using different techniques, we are able to demonstrate that participants were willing to pay less for milk produced using rBST after being exposed to rBST-Free and organic milk, and likewise, willing to pay more for rBST-Free and organic milk after being exposed to milk produced using rBST. In a situation where milk produced using all three techniques is available, the end result is a higher price charged for rBST-Free and organic milk and decreased revenue for farmers and distributors who deal in milk produced using hormones. The implications of the experiment are fairly straightforward – production labeling can indeed be a strong influence on consumer’s perception of a good, and producers of conventional goods in markets where alternative products are being introduced need to be aware of the potential impact of the availability of the new product on the demand for the conventional product.